1969 (8) TMI 28 - HC - Income Tax

Deductibility of expenditure incurred on maintenance of club house and kiosks against profits of racing

Issues Involved:
1. Whether the Tribunal erred in law and/or acted without any evidence or contrary to the materials on record, in holding that in running the club house and the kiosks, the applicant was not carrying on a business activity.
2. Whether the loss sustained by the applicant in running the said club house and the kiosks, and the depreciation on the fixed assets of the club house and the kiosks, were allowable while computing the applicant's profits from the business of running the race-course.
3. If the answer to the above question is in the negative, whether the said loss and depreciation could be set off or adjusted against the said profits under section 10 of the Income-tax Act as loss and depreciation of a different business.

Detailed Analysis:

Issue 1: Business Activity Determination
The Tribunal held that the assessee was not carrying on any business activity in running the club house and kiosks but was merely providing amenities for its members. The Tribunal reasoned that the club house and kiosks catered only to members at less than cost price, incurring losses every year, and therefore could not be considered a business activity. The Tribunal emphasized that "business is a scheme of profit-making," and consistently operating at a loss negates the profit motive essential for a business.

The Appellate Assistant Commissioner (AAC) supported this view, stating that the club house was an amenity offered to members as part consideration for the subscription received from them, and not a business activity. The AAC also highlighted that the club house was open only to members and their guests, and not to the public, thus lacking the essential element of a business.

The High Court, however, disagreed with the Tribunal and AAC, stating that the objects of the company clearly included running a hotel or catering establishment as a declared business activity. The Court opined that the restriction of the club house to members and their guests does not negate its business character. The Court emphasized that the principle of mutuality, which excludes certain activities from being considered business, does not apply here as the club is an independent entity distinct from its members.

Issue 2: Allowability of Loss and Depreciation
Given the High Court's determination that the club house and kiosks were indeed business activities, the losses and depreciation incurred in running these facilities were deemed allowable while computing the assessee's profits from the business of running the race-course. The Court reasoned that providing these amenities was essential for maintaining and attracting business, thus qualifying the expenses as legitimate business expenditures.

The Court referenced several cases to support the notion that expenses incurred for maintaining or increasing business, even if they result in a loss, are allowable deductions. The Court concluded that the expenses over both the refreshment kiosks and the club house at Poona were necessary for the business and thus deductible.

Issue 3: Set-off or Adjustment Against Profits
The High Court answered this question in the affirmative, stating that even if the losses and depreciation from the club house and kiosks were not considered part of the race-course business, they could still be set off or adjusted against the profits under section 10 of the Income-tax Act as losses and depreciation from a different business. The Court emphasized that the principle of mutuality does not apply here, and the activities of the club house and kiosks are legitimate business activities.

Conclusion:
The High Court ruled in favor of the assessee on all issues, determining that the Tribunal erred in law by not recognizing the club house and kiosks as business activities. Consequently, the losses and depreciation incurred in these activities were deemed allowable deductions while computing the assessee's profits from the race-course business. The Court also held that these losses and depreciation could be set off against the profits under section 10 of the Income-tax Act, even if considered as losses from a different business. The assessee was awarded costs to be taxed as per rules.

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